SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

April 08, 2022
SGH Insight
On the heels of a Q1 GDP slowdown in China, Covid lockdowns in Shanghai, and repeated signals from Premier Li Keqiang that more economic stimulus will be forthcoming, markets are trying to assess just how aggressively the People’s Bank of China might loosen its reins on monetary policy.

The answer, according to a senior official in Beijing, is that overall monetary policy in April will be slightly looser than in the previous three months.

On the monetary policy front, officials do not rule out cutting the Reserve Ratio Requirement Ratio or lowering the loan prime rates “in the next few weeks,” but temper expectations in noting that the objective is to set monetary policy in April that will be “slightly looser” than it is now.
Market Validation
Bloomberg 4/13/22

China’s cabinet said the central bank would cut the amount of money that banks have to keep in reserve at the proper time, a further sign there is likely to be additional monetary stimulus to support the economy. “China will use monetary policy tools including a RRR cut at an appropriate time, and will step up financial support to the real economy, especially industries and small businesses that have been hit hard by the pandemic,” the State Council said after a meeting Wednesday, according to state-run television. The People’s Bank of China usually announces a reduction within days of the State Council making such a statement.
Read full report
April 07, 2022
SGH Insight
We would suggest you put any “on the one hand, on the other hand” summary of the just released minutes of the March 10 European Central Bank meeting of the Governing Council safely in your “read later” inbox. They were, in a nutshell, unmitigatedly hawkish.

Indeed, in years of covering major central banks, we find it hard to recall a set of minutes like these, revealing in great depth deliberations and a wholesale challenge and rejection by the ECB’s key policy makers of their chief economist and staff’s continually overly optimistic, dovish, and unrealistic Covid-era inflation forecasts.

In SGH 4/4/22, “ECB: The Adverse Inflation Scenario,” we wrote that a broad consensus had been building around the Governing Council for an end to APP bond purchases in July that will, after the August recess, be likely followed by a first 25 bp rate hike in September and a second 25 bp rate hike in December, to bring the currently negative 0.50% deposit rate to zero before year-end.

We also wrote that with realized inflation continuing to top all the ECB staff expectations, and likely to do so for some more months ahead at least, there was a real chance this still forming consensus and sequencing could be brought forward by roughly two months.

That would mean ending APP in June to open the door for lift-off in July, followed by a second interest rate hike in September or October. Today’s minutes, and our read of the internal ECB deliberations, if anything adds to our sense that the ECB may end up seeking greater optionality and taking this more accelerated path.
Market Validation
Bloomberg 4/14/22

ECB Consensus Building for Quarter-Point Hike in Third Quarter

Consensus is building among European Central Bank Governing Council members to raise interest rates by 25 basis points in the third quarter, according to officials familiar with their deliberations.
Today’s ECB decision was unanimous, said the people, who spoke on condition of anonymity

Reuters 4/14/22
The European Central Bank could still raise its interest rates in July but policymakers agreed at a meeting on Thursday to keep their options open for now as the economic outlook is clouded by the Ukraine war, two sources told Reuters.

The sources close to the matter said policymakers were unanimous in backing Thursday's policy message, which says the ECB would end its bond-buying programme in the third quarter of the year and raise rates "some time" after that.

The euro zone's rate-setters differed, however, on some of the risks, such as that long-term inflation expectations veer off the ECB's 2% target.

Read full report
April 05, 2022
SGH Insight
Our understanding from senior EU officials is that while oil is not part of the new sanctions package now, it is likely to be in the next one, when that comes.

At present, Austria stands in open opposition to a Russian oil embargo, but Germany appears to have softened its resistance, with officials in Berlin stressing that while Germany cannot cut itself off from Russian gas for now, oil is different.

France’s President Emmanuel Macron has already called for a ban on Russian oil imports in response to the Bucha atrocities, a position that would incidentally highlight him in stark contrast to his challenger from the right, Marine Le-Pen’s, who is generally seen as pro-Kremlin, in the first round of presidential elections this weekend.

EU officials know that the oil lever is key, as while the EU is more dependent on Russia’s natural gas, Moscow’s revenues from oil are higher than from gas: in 2021 Russia received $110.2 billion for crude oil and $68.7 billion for oil products, as opposed to $54.2 billion for pipeline natural gas and $7.7 billion for liquified natural gas.

With the war in Ukraine, we believe, nowhere close to an end, and the likelihood if anything mounting of an escalation of direct combat between Russian and Ukrainian forces in the Donbas and Ukraine’s east, we suspect another round of sanctions, this time including oil, may not be so far off.
Market Validation
Bloomberg 4/5/22

EU Moving Toward Adopting Phased-in Ban on Russian Oil, NYT Says

The European Union is moving toward adopting a phased-in ban on Russian oil intended to give Germany and other countries time to prepare alternate suppliers, the New York Times reports, citing officials and diplomats.

Russia oil embargo wouldn’t be put up for negotiation until after French elections.
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April 05, 2022
SGH Insight
...The direction of balance sheet policy is clear – the Fed is going to quickly ramp up to a high cap, we think $100 billion/month, but whatever the actual number, the intent will be to not get in the way of the roll-off of maturing assets such that the balance sheet organically normalizes over the next three years. Balance sheet policy magnifies the impact of rates policy:
The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections...

...Note that neutral may or may not be a stopping place, it is data dependent. The notion that the Fed can stop at neutral and look at what is going on could easily be overtaken by data that makes it clear that the Fed will need to push policy rates above neutral...

...An increase in rates as priced in markets is a clear indication that Brainard accepts the notion of a series of 50bp increases, at least two and maybe three or more if the data don’t provide relief by the middle of the year. I suspect the Fed consensus is pretty much committed internally to 50bp at each of the next two meetings and hoping the data allows for the Fed to recalibrate back down to 25bp after that point. I think market participants will feel pressure to price in additional 50bp rate hikes beyond two as long as inflation stays elevated and labor markets tight...

Market Validation
FOMC Minutes:

Some other participants noted that monthly caps for Treasury securities should take into consideration potential risks to market functioning. Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.

Participants also agreed that reducing the size of the Federal Reserve's balance sheet would play an important role in firming the stance of monetary policy and that they expected it would be appropriate to begin this process at a coming meeting, possibly as soon as in May...

...Participants judged that it would be appropriate to move the stance of monetary policy toward a neutral posture expeditiously. They also noted that, depending on economic and financial developments, a move to a tighter policy stance could be warranted...

...Many participants noted that—with inflation well above the Committee's objective, inflationary risks to the upside, and the federal funds rate well below participants' estimates of its longer-run level—they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting. A number of these participants indicated, however, that, in light of greater near-term uncertainty associated with Russia's invasion of Ukraine, they judged that a 25 basis point increase would be appropriate at this meeting. Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified...
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April 04, 2022
SGH Insight
Fed highlights this week will be the minutes and an appearance by Federal Reserve Vice Chair Lael Brainard. I discuss the minutes below. Brainard’s speech (Tuesday), Variation in the Inflation Experience of U.S. Households, will be an opportunity for her first extensive commentary on the economy since last September. This is an obvious platform to highlight the disproportional impact of inflation on lower income households and further build the narrative that restoring price stability is critical for both minimizing the costs of inflation and preventing the need for the Fed to hard stop the economy (which would also disproportionately damage low-income groups through higher unemployment). There is potential for Brainard to reveal growing concern that trend inflation now exceeds the Fed’s 2% target (see below), which would foreshadow what we expect to be hawkish minutes. It would be notable if Brainard downplayed the inflation situation, but we think that is unlikely.
Market Validation
Bloomberg 4/5/22

Brainard’s Hawkish Comments May Lessen FOMC Minutes Surprises

Treasury yields rose after comments from Federal Reserve Governor Lael Brainard signaled she is on board for faster tightening. These comments may signal a continued shift of the Fed’s most dovish members. Her comments were not a total surprise but traders noted her comments were viewed as much more hawkish than her most recent comments in mid-February. Brainard’s comments may spoil any surprise from Wednesday’s FOMC minutes from the March 16 Fed meeting.

Treasuries Drop to Lows, Curve Extends Steepening After Brainard

Treasury 10-year note futures drop to fresh session lows while 2s10s curve extends to steepest levels of the session after Federal Reserve Governor Lael Brainard says central bank will shrink its balance sheet rapidly and as soon as May.
Around 24k 10-year note futures trade over 3-minute period in move to 121-15 session lows, highest volumes on the session so far; into the move 10-year yields peak at 2.486% session highs
U.S. 2s10s curve extends steepening as intermediates lead Treasuries lower in the aftermath of Brainard comments; 2s10s peaks at 1.2bp and steeper by 4.3bp on the day
Read full report
April 04, 2022
SGH Insight
...When the ECB Governing Council meets for its monetary policy meeting on Thursday, April 14, our understanding is that its number one goal will therefore be to communicate that it is taking inflation seriously.
President Christine Lagarde, as a lawyer by training, will point to the ECB’s inflation mandate and stress the importance of institutional credibility. On the policy front, we believe Lagarde will indicate that a concrete decision to end the Asset Purchase Program, barring some enormous unforeseen development, will come at the next meeting in June.
ECB officials note that while communications after the March meeting have indicated the possibility of an accelerated end to the ECB’s bond buying Asset Purchase Program in the third quarter of 2022, that “in” does not mean the end of the quarter, “as some had interpreted,” but could also mean the beginning, in July...

...ECB officials note that while communications after the March meeting have indicated the possibility of an accelerated end to the ECB’s bond buying Asset Purchase Program in the third quarter of 2022, that “in” does not mean the end of the quarter, “as some had interpreted,” but could also mean the beginning, in July.
The consensus timeframe many ECB officials are now seemingly zeroing in on is a decision to end the APP on June 9, a cessation in July, a first 25 basis points hike at the September 8 quarterly review meeting, followed by a second 25 basis points rate hike at the next quarterly review meeting on December 15.
That more or less quarterly sequencing and pace would bring the ECB deposit rate from -0.50% to zero before the end of the year. Understanding that monetary policy acts with a lag, and that none of these decisions will come in time to impact 2022 inflation, ECB officials will present this as a “normalization” of policy to better position for 2023 and 2024, rather than an outright “tightening” of rates.
Having said that, we expect ECB officials will find it increasingly challenging to explain the logic behind an eight month “normalization” process as it revises its near-term forecasts yet higher and faces a public that is increasingly battered by inflationary pressures, retailers that are scrambling to adjust to higher commodity and input prices, and wages that continue to lag.
We suspect there is therefore an outside chance that rate hike sequence could be brought forward by two months...
Market Validation
ECB Press Conference April 14th
*Lagarde: Bond Buys "Very Likely" To End In 3Q, Could Be Early or Could Be Late

ECB Minutes April 7th:

A large number of members held the view that the current high level of inflation and its persistence called for immediate further steps towards monetary policy normalisation. Inflation was projected to be far above target in 2022, with unprecedented upward revisions over the latest two projection rounds. It was projected to remain above target in 2023, with significant upside risks, as also evidenced by the alternative scenarios. Moreover, it was argued that the baseline inflation projection for 2024 could be assessed to be already effectively on target, when the heightened uncertainty surrounding the outlook and the fragility of the assumptions underlying the projections were taken into account. In addition, available measures of underlying inflation had moved above 2%, suggesting that the staff projections may be underestimating the persistence of above-target inflation.
On this basis it was argued that, for all practical purposes, the three forward guidance conditions for an upward adjustment of the key ECB interest rates had either already been met or were very close to being met.
Read full report
March 30, 2022
SGH Insight
** We believe Moscow will deliver on its demands. If the West continues to refuse to pay in Rubles – which we believe would be the appropriate even if costly response in wartime — Russia will cut off gas supplies. And if European nations reverse themselves, and agree on some face saving “compromise,” we expect they will be quickly facing the threat of if not real de facto price hikes, with a Ruble exchange rate that will for all practical purposes be set by Moscow.
** As of today, our understanding is that Moscow relayed to Beijing that Putin’s order to settle natural gas exports in rubles to “unfriendly” nations (including Europe and Japan) will come into effect in early April, “no matter how the West refuses.”
** Putin will review the proposals for ruble gas payments submitted by the Central Bank of Russia and Gazprom tomorrow, on March 31, and approve it soon after.
** If European countries or Japan insist on paying for gas in euros, dollars, or yen, Moscow has told officials in Beijing that it will refuse to supply gas to them, and that Gazprom is ready to stop supplying gas to Europe “in time.”

....The stand-off over gas is now here.
** We believe Moscow will deliver on its demands. If the West continues to refuse to pay in Rubles – which we believe would be the appropriate even if costly response in wartime — Russia will cut off gas supplies. And if European nations reverse themselves, and agree on some face saving “compromise,” we expect they will be quickly facing the threat of if not real de facto price hikes, with a Ruble exchange rate that will for all practical purposes be set by Moscow.
** As of today, our understanding is that Moscow relayed to Beijing that Putin’s order to settle natural gas exports in rubles to “unfriendly” nations (including Europe and Japan) will come into effect in early April, “no matter how the West refuses.”
** Putin will review the proposals for ruble gas payments submitted by the Central Bank of Russia and Gazprom tomorrow, on March 31, and approve it soon after.
** If European countries or Japan insist on paying for gas in euros, dollars, or yen, Moscow has told officials in Beijing that it will refuse to supply gas to them, and that Gazprom is ready to stop supplying gas to Europe “in time.”...

...We are not alone in suspecting that Russia is redirecting its forces to embark on a new and perhaps equally brutal stage of the war to take control of Mariupol, reinforce its territorial advances connecting the Donbas to Crimea, push north from there, encircle and defeat the one third of Ukrainian forces that have been tied down in defense of the eastern regions and Donbas, and solidify its new territorial claims before coming to the negotiating table — if then...

Market Validation
Bloomberg 4/27/22

Russia to Halt Gas to Poland on Wednesday in Major Escalation
Moscow and Europe are fighting over how gas should be paid for
Poland says it has enough gas in storage; prices jump 17%

Russia will halt gas flows to Poland on Wednesday in a major escalation in the standoff between Moscow and Europe over energy supplies and the war in Ukraine.
Moscow appears to be making good on a threat to cut off gas supplies to countries that refuse Vladimir Putin’s new demand to pay in rubles. Europe has said that doing so would breach sanctions and strengthen Russia’s hand unacceptably. Poland has been particularly vociferous in its criticism of Russia over the war.
Poland’s main gas supplier PGNiG said it has been informed that all flows will stop from Wednesday. Minutes earlier, Russian gas giant Gazprom issued a warning that Poland must pay up for its gas supplies on Tuesday -- in the Russian currency.
“I can confirm we’ve received such threats from Gazprom which are linked among other things to the means of payment,” Prime Minister Mateusz Morawiecki told reporters in Berlin. “Poland is sticking to the arrangements and maybe Russia will try to punish Poland” by cutting deliveries.

European gas prices surged as much as 17% as traders calculated the risk of other European countries being hit next.

Bloomberg 3/31/22

Europe Gas Rises as Putin Threatens Supply Halt in Ruble Demand
Buyers need to open special accounts with Gazprombank: Putin
Italy, Germany earlier signaled Russia is softening its stance

European natural gas rose as Russian President Vladimir Putin said supplies would stop if buyers don’t pay in rubles.
Clients should open special accounts in state-controlled Gazprombank JSC to allow foreign currency to be swapped to rubles for settlements, according to an order signed by Putin. The new rules will be valid from April 1.

3/31/22 @NatashaBertrand

NATO Secretary General Jens Stoltenberg said today that according to NATO's intel, "Russian units are not withdrawing but repositioning. Russia is trying to regroup, resupply and reinforce its offensive in the Donbas region. At the same time, Russia maintains pressure on Kyiv"
Read full report
March 30, 2022
SGH Insight
Regarding sanctions:
Western reports that Sinopec has suspended talks on Russia projects are not accurate. What I want to say is that none of the cooperation projects under negotiation with Russia, including energy cooperation projects, will be suspended, or abandoned. Of course, the Chinese side will carry out “technical” handling of relevant Sino-Russian cooperation projects. Economic and trade cooperation between China and Russia, especially energy cooperation, will only increase rather than decrease.

And regarding OPEC+:

According to feedback from Moscow and Riyadh, there will be no surprise decision of the meeting of the OPEC+ joint ministerial monitoring committee on March 31. The meeting will not [recommend an] increase in crude oil production [other than] the original plan. The original plan of oil production recovery by 400,000 barrels per day in May remains the main option for the OPEC+ meeting.
Market Validation
Bloomberg 4/21/22

China’s key state-run energy companies are
in talks with Shell Plc to buy its stake in a major Russian gas
export project, according to people with knowledge of the

Cnooc, CNPC and Sinopec Group are in joint discussions with
Shell over the company’s 27.5% holding in the Sakhalin-2
liquefied natural gas venture after the European firm said it
would exit Russian operations following the Ukraine invasion,
said the people, who requested anonymity to discuss private

AFP 3/31/22

OPEC+ sticks to modest oil output increase

OPEC and its Russia-led allies on Thursday stuck to their policy of modest oil production increases despite Western pressure to step up production as the Ukraine conflict has rocked the market.
The group said in a statement that it would increase production by 432,000 barrels per day in May, marginally higher than the 400,000 barrels per day released in previous months.

Read full report
March 25, 2022
SGH Insight
...This official also shares a very dark, and sobering view on the likely course of the Ukraine war:
“It is unrealistic to expect the Ukraine crisis to end anytime soon. With Russia introducing a series of highly targeted counter-sanction measures, global crude oil and gas prices will continue to rise, and the world is likely to suffer from severe food shortages and even a worldwide food crisis this year.”

“For Ukraine,” he adds, “the negotiations are just to buy time. Because Europe followed the US in imposing nuclear-level economic sanctions on Russia, the Russian economy has suffered an unprecedented blow, and Russia will also make Europe suffer unforgettable pain. Moscow believes that the longer Russia strikes against Ukraine, the worse the European economy will be, the more chaotic the European social order will be, and the more distant the relationship between Europe and the US will be.”

“Alexander Novak (Russia’s Deputy Prime Minister and co-chair of the China-Russia Energy Cooperation Committee) told us a few days ago that the pain in Russia is immediate pain, while that in Europe is long-term pain. Russia has enough food, oil, and gas, while Europe needs to import a lot. Russia is not afraid to fight a protracted war while the European economy cannot afford it.”

...Russia is currently in active discussion with its “Asian partners,” especially China and India, regarding the possibility of sending extra oil supplies to the Asian market. Moscow has decided to offer preferential prices to China, India, and other “friendly countries” to expand its exports of crude oil, natural gas, and other commodities...

...According to China’s state media, President Xi Jinping told Britain’s Prime Minister Boris Johnson in a phone call today that the international community should “truly” promote peace talks, where China is willing to “continue” to play a constructive role.
As the West pleads with Beijing to press Russia’s President Vladimir Putin to end the Ukraine war, China continues to present its position in the war as that of a moderating force, reiterating its alleged commitment to the tenets and principles of the United Nations Charter and basic norms of international law.
As to actions, however, Beijing remains unequivocally committed to its support and strategic relationship with Moscow, despite US President Joe Biden’s alleged, and it appears largely ignored, threats of unspecified severe consequences to China of continued “material” assistance to Russia.
Market Validation
South China Morning Post 5/15/22

China, Russia tipped to power up energy ties as Europe weans itself off Putin’s oil and gas

China remains a stable buyer of Russian oil and unlikely to join Western sanctions, analyst says
Soyuz Vostok pipeline will expand gas trade between countries already linked by the Power of Siberia pipeline
Energy cooperation between China and Russia is expected to step up, according to observers in China, as Europe looks to wean itself off Russia's oil and gasafter the Ukraine war.
The assessment was made during a closed-door seminar hosted by Renmin University in Beijing by a group of Chinese diplomatic researchers looking into the war's impacts on China and the global economy.
It also came as Russia, which produced roughly 10 per cent of global oil and supplied some 40 per cent of Europe's gas before the war, appeared undeterred, even as the West was ratcheting up economic and financial sanctions.
Major Asian economies are among the few remaining buyers of Russia's oil and gas. India has ramped up oil imports from Russia at substantial discounts, while China, which has bought an estimated 25 per cent of Russia's oil, has been a stable importer, according to Li Wei, an associate professor with Renmin University's school of international studies.
"As long as China does not participate in the sanctions, one-quarter of Russia's crude oil export revenue is safe," Li said at the seminar, according to an edited transcript published by a WeChat account run by the school.

The Times 4/19/22

China warns EU a long war in Ukraine could lead to its break-up

China’s state media has warned the European Union that an extended war in Ukraine could lead to its break-up, while assuring Moscow of Beijing’s unwavering support.
“Is Europe prepared to see a ten-year war on its own continent? Imagine what would happen to Europe: It would turn into a bleeding decade,” an editorial in the state-controlled Global Times argued, citing remarks by President Zelensky that the war could drag on for years.
It accused Washington and Nato of prolonging the war by supplying Ukraine with economic and military aid, “cheering Ukraine on to fight a ten-year war”.
● Russia begins assault across Ukraine’s eastern front
It added: “By then, Europe, being entangled in a war, will completely lose its security autonomy and become fully reliant on the US umbrella. It will have to confront a ten-year crisis on energy, food, refugees and inflation. Social turmoil will surface. The bloc may even split on the issue,” the party newspaper warned.

Bloomberg 3/31/22

Russia Offers Oil to India at Big Discount to Pre-War Price

Russia is offering India steep discounts on
the direct sale of oil as mounting international pressure lowers
the appetite for its barrels elsewhere following the invasion of
Ukraine, according to people with knowledge of the matter.
The sanctions-hit nation is offering its flagship Urals
grade to India at discounts of as much as $35 a barrel on prices
before the war to lure India to lift more shipments, the people
said, asking not to be identified discussing confidential

PTI 3/30/22

China says no limit for cooperation with Russia as Lavrov arrives for talks amid Ukraine war

China says no limit for cooperation with Russia as Lavrov arrives for talks amid Ukraine war

Hosting Russian Foreign Minister Sergey Lavrov, the first high level Russian official to visit Beijing after the Ukraine war, China on Wednesday said “cooperation” between the two allies has no “ceiling” to resist “hegemony”.
Lavrov arrived in Tunxi, east China's Anhui Province, for the third meeting of foreign ministers on Afghanistan, Russia's official news agency Tass reported on Wednesday.
"There is no ceiling for China-Russia cooperation, no ceiling for us to strive for peace, no ceiling for us to safeguard security and no ceiling for us to oppose hegemony,” Chinese Foreign Ministry spokesman Wang Wenbin told a media briefing here when asked to describe the limits of China-Russia relations.

Read full report
March 22, 2022
SGH Insight
EC officials note that of the 800 billion euros of the already agreed joint borrowing for the post-Covid recovery fund, only 74 billion have been disbursed so far. By April, the disbursements will total 100 billion euro, which will still leave 700 billion euros left to be jointly borrowed and disbursed. That is a lot of money, even by 2020s standards.

The Commission also notes that 200 billion euros of the NGEU (Recovery Fund) total has still not been claimed by anyone so far. The hesitance, or lack of interest, appears to stem from the fact that these funds are in the form of cheap loans, and not outright grants. The Commission is encouraging member states that have bypassed these available loans to at least claim their part, before calling for any new joint borrowing program.
Market Validation
Bloomberg 3/23/22

The European Union’s budget chief pushed back against the idea of raising new joint debt to weather the impact of the ongoing war in Ukraine and to finance the bloc’s defense and energy priorities.

instead, Johannes Hahn urged member states to use more than 1 trillion euros ($1.1 trillion) of EU funds available to cope with the current crisis.

“Honestly, there is money and there is still flexibility to discuss the use of funds,” the budget commissioner said in an interview.

Hahn said he considered the debate on possible new tools a distraction and added that more solidarity among member states would come if the current EU funds are properly used and show results.

Hahn stressed that the consensus among member states is to focus for now on deploying available funds, including 350 billion euros of structural funds that could be used flexibly, in addition to the Next Generation EU money.
Read full report
March 21, 2022
SGH Insight
Monday Morning Notes, 3/21/22
As I have repeatedly warned, the data suggests the Fed will need to push rates into contractionary territory to pull inflation back to 2%. Even the Fed doves now recognize that as a strong possibility. Again, absent a sudden decline of inflationary pressures, the most recent slightly-above-neutral rate projections were only a stopping point along the way to that outcome. Given the distribution of the dots and the Fed’s rapidly diminishing tolerance for inflation, it is very easy to see how a seven 25bp rate hike baseline in the March SEP becomes a “nine 25bp hike baseline” in June, which means in practice some of this year’s hikes will be 50bp, perhaps as early as at the May meeting.
Market Validation
Bloomberg 3/21/22

Fed-Dated Overnight Swaps Price in Seven Hikes For December FOMC

Extended weakness across front-end of the Treasuries curve has seen overnight swaps bid up, with Fed-dated contracts now pricing in an additional seven 25bp rate hikes by the December meeting.
Eurodollar futures have bear steepened with green-pack contracts (Jun24-Mar25) lower by up to 10.5bp on the day; white-pack contracts lower by 4.5bp to 9bp

Early eurodollar options action has seen buyer of downside, targeting additional hike premium priced for mid-2023 via 15,000 Jun23 eurodollar 97.00/96.875/96.625/96.50 put condor bought at 1.5 says U.S. trader

Fed-dated OIS now pricing in 39bp, or just over 50/50 chance of a 50bp hike at the May policy meeting and 175bp -- or seven additional standard 25bp moves -- into the December FOMC

Bloomberg 3/21/22

Treasuries Slide to Fresh Lows After Powell Comments on Rates

Treasuries drop to new lows of the day, with losses led by front- and belly of the curve, and the dollar firmed after Fed Chair Powell says if the central bank needs to hike by more than 25bp or tighten above neutral it will.
Treasury 2-year yields cheaper by nearly 14bp on the day as Fed premium ramps-up in front-end; Fed-dated OIS now pricing in around 40bp of rate hikes into the May meeting, or 60% chance of a 50bp move
U.S. 5-year yields cheaper by nearly 15bp on the day as 5s30s slides to new lows, flatter by 7bp on the day
USD/JPY rose toward session highs around 119.25
Read full report
March 16, 2022
SGH Insight
A Hawkish Hike

We think that if the Fed really expects to get inflation under control, rates will need to end 2022 closer to the highest dot, 3.125%, than the current median dot. We suspect this was St. Louis Federal Reserve President James Bullard’s dot. He dissented at this meeting, seeking 50bp. We didn’t think there would be a dissent given that the door is clearly open for a 50bp rate hike at the next meeting, but if you want to get 300bp of rate hikes in this year, frontloaded, almost every meeting must be 50bp.
Market Validation
Bloomberg 3/18/22

Federal Reserve Bank of St. Louis President
James Bullard said he dissented at this week’s meeting because
he wanted the U.S. central bank to implement a balance-sheet
reduction plan -- in addition to a half percentage-point hike --
adding that he favors raising rates more sharply this year than
any of his colleagues.
“I recommended that the Committee try to achieve a level of
the policy rate above 3% this year. This would quickly adjust
the policy rate to a more appropriate level for the current
circumstances,” Bullard said in a statement Friday released by
the bank and posted on its website. “In my view, raising the
target range to 0.50% to 0.75% and implementing a plan for
reducing the size of the Fed’s balance sheet would have been
more appropriate actions,” for this week’s meeting.
Read full report
March 14, 2022
SGH Insight
The FOMC meeting this week will end with the Fed’s first rate hike of this cycle. The Fed will raise rates 25bp. While the option of 50bp will likely be discussed, uncertainty associated with the invasion of Ukraine along with Federal Reserve Chair Powell’s stated preference for 25bp makes the odds of a larger hike very slim. The FOMC statement will signal that further rate hikes are expected assuming the economy continues to evolve in line with projections. In addition, I expect the Fed will highlight the Ukraine conflict as presenting both upside risks for inflation and downside risks for growth. Watch for the Fed to add language such as “the Committee expects it will soon be appropriate to reduce its holdings of Treasury and mortgage-based securities.” This would signal that the Fed expects to announce its plans for unwinding the balance sheet as early as the May FOMC meeting.
Market Validation
Bloomberg 3/16/22
Treasury Rates Jump as Market Moves to Price More Fed Tightening

Treasury yields surged Wednesday, led by rates at the front end of the curve, after the Federal Reserve raised interest rates by a quarter of a percentage point and said ongoing increases would be appropriate.
The two-year note yield climbed as much as 14 basis points to 1.99%, while the five-year rate jumped as much as 11 basis points to 2.21% in the Treasury selloff.
The central bank also said it would begin reducing asset holdings at a coming meeting.

Federal Reserve issues FOMC statement
For release at 2:00 p.m. EST

The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.
Read full report
March 10, 2022
SGH Insight
While the final revision forecast will not be rolled out until tomorrow, the draft released today included three scenarios — a “base” case, an “adverse” scenario, and a “severe” scenario.
The three forecasts have inflation spiking in 2022 respectively to roughly 5%, 6% and 7%, and in all cases dropping to 2% by 2024, except in the severe case, where it drops even more.

Despite having been wrong over and again, these forecasts still appear to rely heavily on varying and significant assumptions of the temporary nature of supply side constraints, on the temporary nature of elevated energy prices, and on an almost entirely demand destruction narrative of the impact of consistently high energy prices. They appear to ascribe no lasting impact on the broadening of inflationary pressures through the system that the globe, even the Eurozone, has been experiencing now for almost two years.
Market Validation
ECB Minutes April 7th:

In their discussion of the March 2022 staff projections, members noted the substantial upward revision to the short-term inflation outlook since the December 2021 projections. February’s inflation data release was the latest in a string of consecutive upside surprises. This had led to the largest revisions to inflation projections in many years, both in December and again in March. The high levels of inflation had thus turned out to be less transitory than previously expected, while the latest ECB staff projections nonetheless still foresaw a rapid decline in inflation, nearly to target, over the projection horizon. Sizeable and persistent projection errors for core inflation were also seen as a reminder that the models were underestimating the impact of the recovery and the pass-through of input prices to final consumer prices.
In particular, doubts were expressed about the convergence of inflation to 1.9% as expected in the baseline staff projection for 2024, the last year of the projection horizon. The question was raised as to how one could expect such a fast mean reversion in inflation, faster than in the previous projection round, after the current huge shocks to inflation. It appeared puzzling that inflation projections would still fall somewhat short of the 2% target in 2024 despite consecutive upside surprises in inflation outcomes, a persistently positive output gap for most of the projection horizon and the latest increases in longer-term inflation expectations. In this context, it was acknowledged that models estimated on historical data naturally had their limits in the face of unusual shocks and possible turning points or regime shifts.
It was again stressed that the medium-term projection for headline inflation was based on the assumption of a declining path of energy futures prices. Such a path was seen as open to challenge in the light of various factors in energy markets pointing to more lasting upward pressures. These included the sanctions on Russia, Europe’s plan to reduce Russian gas imports and climate change initiatives. Sensitivity analyses using alternative technical assumptions for energy commodity prices could imply inflation projections of well above 2% for 2023 and 2024. At the same time, it was cautioned that all mechanical assumptions for oil prices had their caveats and that for interpreting the projections it was more important to understand whether oil prices were driven by demand or supply shocks.

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March 10, 2022
SGH Insight
Meanwhile, Sarah Bloom-Raskin’s confirmation prospects dimmed further. Republicans are holding up the entire slate of Federal Reserve nominees – all five positions – in an effort to derail the appointment of Sarah Bloom-Raskin. Her op-ed on climate change and the Fed weren’t helping her to begin with, and her still-unresolved involvement with Reserve Trust has been an unexpected complication. Moreover, her hostility to the fossil fuels industry isn’t doing her any favors with gasoline prices spiking and the Administration hoping for domestic oil producers to boost output. The latest – and perhaps final blow – to her confirmation was delivered by Senator Joe Manchin who advised President Biden to move forward on the other four nominations.

Biden might need to cut Raskin loose to speed the confirmation of Biden’s other two appointments, Lisa Cook and Phillip Jefferson, who are not exactly hawkish candidates. That said, if Biden gives up on Raskin, he may be hard pressed to find another candidate acceptable to both Republicans and the Warrenite-wing of the Democrats; the supervision position may be left open for a long time.
Market Validation
PunchBowl 3/15/22

We covered this in the PM edition, but Sarah Bloom Raskin’s nomination to be vice chair of the Federal Reserve is all but officially done. Sens. Joe Manchin (D-W.Va.), Susan Collins (R-Maine) and Lisa Murkowski (R-Alaska) have all signaled they will not vote for her. Raskin doesn’t have a path to confirmation that we can see.

Although Senate Banking Chair Sherrod Brown (D-Ohio) has signaled he won’t give up on her nomination, we have to imagine the White House will pull her in the days ahead or Raskin will withdraw on her own. Republicans have been blocking the confirmation of a slate of other Federal Reserve nominees – including Jay Powell for another term as chair – because of their opposition to Raskin.
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March 07, 2022
SGH Insight
Iranian officials negotiating in Vienna to limit the country’s nuclear program in exchange for a lifting of sanctions, including on its critical oil exports, have struck an optimistic tone on the prospects for a deal now for some weeks.
While Iran’s eleven-month negotiations with the “P4+1” countries (UN Security Council Permanent Members UK, France, China, Russia + Germany), with the United States weighing in the background, have been derailed numerous times in the past, our understanding is that a deal is now indeed forthcoming.

Negotiations have been complicated by Russia’s last-minute efforts to link any deal with Iran with sanctions just imposed on it by Europe and the United States after its invasion of Ukraine, but we believe that will stall, and not derail, what was to be an imminent deal for a short period of time. We truthfully do not know for exactly how long.

Tehran has been negotiating furiously with Washington for a deal now for months, even if by proxy, and Iranian officials have openly bristled at recent interventions by Moscow to derail the nuclear negotiations.
Market Validation
Reuters 3/15/22

Oil plummets as Russia seeks resumption of Iran nuclear deal

LONDON — Oil prices dropped to their lowest in almost three weeks on Tuesday as Russia indicated it is in favor of the Iran nuclear deal resuming as soon as possible.

Brent futures were down $8.90, or 8.3%, to $98 a barrel at 1125 GMT, while U.S. West Texas Intermediate (WTI) crude was down $8.97, or 8.7%, to $94.04 a barrel.

Both benchmarks fell below $100 a barrel for the first time since March 1.

Brent has lost almost $40 since 14-year highs reached on March 7, while WTI has fallen by over $30 since touching highs since 2008 almost a week ago.

The sharp decline in prices follows a statement from Russian foreign minister Sergi Lavrov on Tuesday that Moscow is in favor of the 2015 Iran nuclear deal resuming as soon as possible and is waiting for Washington to lift sanctions on Tehran.

Talks to revive the nuclear accord, which would lead to sanctions on Iran’s oil sector being lifted, recently stalled due to Russian demands.

Bloomberg 3/15/22

The U.S. has given Russia “written guarantees” that sanctions imposed over the invasion of Ukraine won’t affect Moscow’s nuclear partnership with Iran, potentially allowing for the resumption of talks to revive the 2015 atomic accord. Oil prices fell.

World powers and Iran suspended their efforts to restore the nuclear pact on Friday, amid deepening tensions between the Kremlin and the White House.
Iran Nuclear Talks Suspended as Window Closes on Key Deal

Russian Foreign Minister Sergei Lavrov called on March 5 for U.S. assurances due to concern that sanctions under consideration by the Biden administration would interfere with fuel supplies to Iran’s only operating atomic-power plant in Bushehr and the planned construction of a second facility.

“We received written guarantees,” Lavrov said Tuesday after meeting his Iranian counterpart in Moscow. “They are included in the text of the agreement itself,” he said adding that these “provide reliable protection for all projects and activities envisaged” in the nuclear deal.

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March 04, 2022
SGH Insight
Fueled by fears that inflation expectations are out of hand and that second-round effects will create a bigger policy headache down the road, the Bank of England is not wavering from its campaign to frontload a series of hikes to help guide interest rates toward neutral and bring inflation under control.

The Monetary Policy Committee is set to hike 25bps at each of its next two meetings at least, adding to its two recent consecutive moves that took the benchmark rate to 0.50%. Hikes at the upcoming March 17 and May 5 meetings will take the benchmark rate to 1.00%. A June move is likely, but less certain.
Market Validation
Bloomberg 3/18/22

Pound Trims Gains as Bank of England Highlights Symmetric Risks

The pound faded an earlier gain against the dollar after the Bank of England delivered an expected 25 basis point hike, but warned of symmetric risks. “Based on its current assessment of the economic situation, the Committee judges that some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on bothsides of that judgement,” the statement read.

Here are the key headlines:


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March 03, 2022
SGH Insight
The Commission will propose next week that the short-term action to reduce dependence on Russia should be to buy more LNG from the United States and Qatar. Each EU region now has a direct or indirect connection with an LNG terminal, so that at least is doable.

The second move will be to ensure gas storage facilities in Europe are at least 80% full by the end of September every year, to be ready for the winter. To drive that home, the Commission wants to propose a law that obliges EU governments to observe that.
Market Validation
Bloomberg 4/7/22

EU Parliament Backs Plan to Fill Gas Reserves Ahead of Winter

The European Parliament endorsed a proposal
by the European Commission to replenish the bloc’s depleted
natural gas reserves to 80% of capacity by Nov. 1.

* Assembly backed the plan in a fast-track vote on Thursday,
paving the way for talks with member states on the final shape
of the regulation
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March 03, 2022
SGH Insight
President Xi Jinping has instructed China’s State Council to support Russia in the spheres of economy, finance, trade, and high technology, and to help Russia cope with western sanctions.
Chinese companies will be told to give priority to purchasing Russian products, which are “basically the same in quality and price” as those from Western countries.
Sino-Russian traded goods is said should be settled directly in Chinese Renminbi and Russian Ruble as soon as possible. Chinese foreign trade companies that have difficulties in settling accounts directly with RMB and Ruble are told they can conduct barter trade.
Market Validation
Bloomberg 3/8/22

China Considers Buying Stakes in Russian Energy, Commodity Firms
Beijing’s talking with state-owned firms on opportunities
Any deal is to bolster energy, commodity imports

China is considering buying or increasing stakes in Russian energy and commodities companies, such as gas giant Gazprom PJSC and aluminum producer United Co. Rusal International PJSC, according to people familiar with the matter.
Beijing is in talks with its state-owned firms, including China National Petroleum Corp., China Petrochemical Corp., Aluminum Corp. of China and China Minmetals Corp., on any opportunities for potential investments in Russian companies or assets, the people said. Europe
The two countries had already been strengthening ties, with Presidents Xi Jinping and Vladimir Putin last month signing a series of deals to boost Russian supply of gas and oil, as well as wheat. Gazprom and Rosneft PJSC were among Russian energy giants sealing agreements as the two leaders met in Beijing ahead of the Winter Olympics.

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March 03, 2022
SGH Insight
GDP Target
The Central Economic Work Conference (CEWC) in December recommended setting the 2022 GDP target for China in a range of 5.0-5.5%.
Given the current geopolitical conflicts, disruptions of global industrial chains, and high inflation, the politburo meeting however recommended a 2022 GDP growth rate target of “above 5.0%.”
Under Chinese law, the government work report and its development targets must be reported to the Chairman’s meeting of the NPC Standing Committee and approved before the “Two Sessions.” Premier Li submitted two proposals to the top legislature: a 2022 GDP growth rate target at above 5.0%, or a range of 5.0-5.5%. The chairman’s meeting of the NPC Standing Committee will make the final decision.
Market Validation
Bloomberg 3/5/22

China’s government signaled more stimulus is
on the cards by setting an aggressive economic growth target,
calling for confidence amid rising domestic strains and global
instability stemming from Russia’s invasion of Ukraine.
While the growth goal of about 5.5% for this year is the
lowest in more than three decades, it’s above consensus
forecasts closer to 5% and far higher than the International
Monetary Fund’s projection of a 4.8% expansion.
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